Why SolarCity Needed to Offer a Groupon

With growth rates in most key metrics exceeding 100%, SolarCity (NASDAQ: SCTY) seemed like the last company that would need to engage Groupon (NASDAQ: GRPN) to hock its products.

The installer of rooftop solar systems at monthly costs comparable to the local power utility, SolarCity doesn't appear to lack customers after reaching the 110,000 threshold in the last quarter. Typically Groupon provides promotions for small business clients to attract customer attention in crowded marketplaces. The business proposition relies on obtaining repeat business after getting the customer in the door for the first time.

In the case of SolarCity, the customer signs a 20-year lease with the company for the solar-powered energy. So while the deal locks in long-term cash flow for the company, SolarCity continues to run into one major problem that it hopes to improve with a Groupon deal.

Strong customer growthFor the first quarter, the company added the largest quarterly gain in history, at 17,664 customers. It also deployed 67 megawatts in the residential segment for 100% growth, so the company doesn't lack the ability to add or attract customers. Anybody reading the financials of the hot solar stock will notice one glaring problem after the revenue and growth numbers.

In the first quarter, operating expenses soared even faster than revenue at a nearly 140% clip. For the quarter, total operating expenses increased to $81.8 million, rising from only $34.3 million in the first quarter of 2013. With only $29.1 million of operating lease revenue, SolarCity has a major problem despite the long-term cash flow stream. The company claims the MW acquisition costs declined to only $0.60 per watt, an improving metric but one that doesn't help when the absolute number continues to soar with each additional customer.

The most concerning part is that SolarCity guided to sequential revenue growing on the high end at nearly $14 million, while operating expenses could jump up to $29 million to reach $110 million.

Online customer acquisitionConsidering the astronomical acquisition costs that cloud the horizon for the company, the decision for a surprising deal with Groupon might actually make a ton of financial sense. According to Zacks, SolarCity spends $6,000 to $8,000 via a direct sales force to acquire a customer. Considering that amount, the deal with Groupon might just help lower costs.

The Groupon deal involves the customer only paying $1 upfront to consult with SolarCity on installing rooftop solar panels. The customer gets $400 of solar power free if it goes forward with the deal. For SolarCity, the company spends $400 plus a fee for the Groupon service, so potentially around $500 to acquire a customer plus the costs of the consultation -- potentially substantially lower than the current costs.

With more than 200,000 active deals, the benefit to Groupon is likely minimal. Considering SolarCity has to spend significantly to attract existing customers, it would appear unlikely that many would jump on a Groupon for such a big purchase that includes a 20-year lease. With expected revenue of more than $3.2 billion for the year, even if a few thousand customers signed up for the SolarCity deal, it wouldn't move the needle for the stock.

Bottom lineInvestors need to really keep in mind that despite the long-term potential of the SolarCity model, the company is now pushing very aggressively to expand the market. While each individual contract might have an attractive long-term cash flow equation, the company could struggle under its own weight as short-term losses mount and interest expenses grow. The Groupon deal is important for the company to solve the spiraling customer-acquisition costs that aren't sustainable.

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If Zacks really said that SolarCity -- or any residential solar installer -- spends $6000 to $8000 to acquire a customer they must be smoking crack. The actual cost is in the $500 to $1500 range. The Groupon offer is brilliant because potential customers pay SolarCity $1 to be added to SolarCity's database. If the then lease solar and get the $400 discount they become a low-acquisition-cost customer. If they don't lease now, the Groupon offer expires and SolarCity still has their dollar and their contact information for future follow-up when solar prices fall even further. It seems like a great strategy to me, and I'm sure other large solar installers will offer their own versions of the idea soon.

I think Mark Holder, and even Zacks, are playing symantics here. Clanza875 and BKarney, you are correct, if it costs them $6-$8G to acquire each customer it would be ridiculous. And unless someone can show proof of this, other than just speak out of their $%^#, then I think common sense is going to have to prevail here and say that Solarcity would already be out of business it this cost was even close to true.

“direct sales force”

Web definitions

1. A group of salespeople employed by a manufacturing company to work exclusively in promoting and selling its own products.

I became interested in Groupon(GRPN) when a fellow SA member (Brent Atwood) posted a StockTalk on the subject of GRPN being naked shorted. You can Google his name and a cached version of his StockTalk will appear. When originally reading his article, I thought that he was one of those conspiracy wackos. Over the course of time it became very apparent that he was correct in his assessment of the naked shorting on GRPN.

Before I address Naked Short selling and how it relates to GRPN, let's review a few items.

Precedence:

From Wikipedia:

"Naked short selling is a case of short selling without first arranging a borrow. If the stock is in short supply, finding shares to borrow can be difficult. The seller may also decide not to borrow the shares, in some cases because lenders are not available, or because of the costs of lending. When shares are not borrowed within the clearing time period and the short-seller does not tender shares to the buyer, the trade is considered to have "Failed To Deliver." Nevertheless, the trade will continue to sit open or the buyer may be credited the shares by the DTCC until the short-seller either closes out the position or borrows the shares.

It is difficult to measure how often naked short selling occurs. Fails to deliver are not necessarily indicative of naked shorting, and can result from both "long" transactions (stock purchases) and short sales. Naked shorting can be invisible in a liquid market, as long as the short sale is eventually delivered to the buyer. However, if the covers are impossible to find, the trades fail. Fail reports are published regularly by the SEC and a sudden rise in the number of fails-to-deliver will alert the SEC to the possibility of naked short selling. In some recent cases, it was claimed that the daily activity was larger than all of the available shares, which would normally be unlikely." - SEC Chairman Christopher Cox

Make no mistake about it, naked shorting is the equivalent of counterfeiting. People that naked short an equity are essentially selling something they don't own. FTD's may go unsettled for an indefinite time. Thus, an equity may have a fixed float, but in reality may have a massive amount of fictitious shares being traded. These counterfeit shares wreak havoc on a company's shares.

Destroys a company's ability to grow by preventing it from accessing capital via acquisitions, employee compensation, hiring new talent, etc.

Many sources have indicated that hundreds of companies that have went bankrupt due to naked shorting.

So what do the big players in the industry have to say on the matter?

"...when someone fails to borrow and deliver the securities needed to make good on a short position, after failing even to determine that they can be borrowed, that is not contributing to an orderly market, it is undermining it. And in the context of a potential "distort and short" campaign aimed at an otherwise sound financial institution, this kind of manipulative activity can have drastic consequences"

Shocking huh? Of course let's not ignore an un-redacted document that Goldman, BoA/Merrill Lynch lawyers accidentally released in their legal proceeding with their Overstock lawsuit.

"We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them." - Thomas Tranfaglia former Merrill Pro president 2005 email"

Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. "We have to be careful not to link locates to fails [because] we have told the regulators we can't," - Goldman executive"

"Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of "failing" trades - in other words, not bothering to locate, borrow, and deliver stock within the time allotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, "We will let you fail."

""*uck the compliance area - procedures, schmecedures" - Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales."

Now from the infamous Universal Express legal proceedings, in which Universal Express received a Florida jury verdict in excess of $700,000,000 against "naked shorters", after which the SEC proceeded to throw the legal book at Universal Express.

"The SEC has permitted billions, if not trillions, of unregistered and counterfeit shares to be sold in the name of companies by brokers and dealers. Those shares are never delivered to ordinary investors, thus destroying the investments of these investors and their retirement savings. This further dilutes and destroys the market value and stock prices of thousands of companies, forcing them to downsize or go out of business and thus resulting in the loss of jobs for tens of thousands of their employees. In addition, trillions of unpaid tax dollars are not being paid to the government which, if paid, would have eased the tax burden on all ordinary taxpayers and have paid off most of our National Debt."

Notice that on a single trading day (05/14/2014), there were over 2.4 million GRPN transactions that generated an FTD. The is not 2.4 million shares. Its 2.4 million FTDs!!! Thus, if we assume the average transaction was 100 shares, one can conclude there were conservatively 240 million shares that that went short GRPN. How's that even remotely possible? Its not. I have also listed FTD's for peers and also for larger corporations for comparison.

SETTLEMENTDAT SYMBOL QUANTITYFAILS PRICE

20140514 GRPN 2402337 6.33

20140501 COUP 32356 16.82

20140507 SALE 34848 30.18

Compare GRPN to some of the titans in the industry.

SETTLEMENTDATE SYMBOL QUANTITYFAILS PRICE

20140506 AMZN 20669 310.05

20140507 INTC 105960 26.20

This is so blatantly obvious, you may wonder what why the SEC doesn't do something about it? Their normal response is to state that 99% of all trades are legal and thus, it would make no sense implementing a fail safe mechanism to prevent naked shorting. Well my friends, that 1% equates to billions of dollars annually that is coming out of your pension, 401K, tax dollars, etc. Now, you might be thinking one data point doesn't make a trend or pattern. So I decided to rewind the tape and access the archived data that the SEC provides on their site.

SETTLEMENTDATE SYMBOL QUANTITYFAILS PRICE

20140218 GRPN 22894 10.51

20140219 GRPN 31282 10.26

20140220 GRPN 69858 10.02

20140221 GRPN 452 10.29

20140224 GRPN 26451 8.04

20140225 GRPN 2278 7.78

20140226 GRPN 9941 8.41

20140227 GRPN 15948 8.26

20140228 GRPN 22943 8.52

20140501 GRPN 7871 6.99

20140502 GRPN 18035 7.08

20140505 GRPN 68617 7.09

20140506 GRPN 22921 6.89

20140507 GRPN 9000 6.72

20140508 GRPN 16913 5.33

20140509 GRPN 29876 5.66

20140512 GRPN 5206 6.05

20140513 GRPN 9279 6.15

20140514 GRPN 2402337 6.33

20140203 GRPN 2198 10.46

20140205 GRPN 49438 10.51

20140211 GRPN 39795 11.08

20140213 GRPN 20754 10.49

20140214 GRPN 32566 10.76

20140115 GRPN 39435 11.41

20140116 GRPN 20015 11.04

20140117 GRPN 8550 10.98

20140121 GRPN 32613 10.84

20140122 GRPN 4116 10.95

20140123 GRPN 11471 10.75

20140124 GRPN 822 10.64

20140127 GRPN 495748 10.28

20140128 GRPN 111134 10.00

20140129 GRPN 7628 10.52

20140130 GRPN 21845 10.43

20140131 GRPN 918 10.87

20140103 GRPN 7605 11.85

20140106 GRPN 3393 12.08

20140107 GRPN 12886 11.89

20140108 GRPN 10369 11.88

20140109 GRPN 61339 11.78

20140110 GRPN 17918 11.44

20140113 GRPN 86694 11.56

20140114 GRPN 143456 10.98

What happens when the market doesn't comply with the naked short? You keep printing fictitious shares and naked short them. This was the case at the end of December. Keep in mind the highlighted items below of totals 610,000 FTD's, not shares!!! A modest 60 to 100 million shares naked shorted.

SETTLEMENTDATE SYMBOL QUANTITYFAILS PRICE

20131216 GRPN 16493 10.24

20131217 GRPN 40344 10.36

20131218 GRPN 4409 10.66

20131219 GRPN 289413 11.27

20131220 GRPN 1459 11.65

20131223 GRPN 1679 11.67

20131224 GRPN 6639 11.82

20131226 GRPN 321338 11.84

20131227 GRPN 2040 11.99

20131231 GRPN 12512 11.33

What is causing all of these FTD's to occur with GRPN? Obviously it has to do with people shorting the stock when there are no available shares to short. You might then ask yourself, why does the SEC allow a company to be shorted when there are no shares to be shorted, as proven by the millions of FTDs being generated by GRPN?

I believe there are certain entities that are pulling the strings on GRPN's share price. How does it work? Follow me on this. Imagine if there were X number of available shares of the float that are lended out to be shorted. What would happen if a trading house knew exactly how many shares to short before it would generate an FTD? Well, if I was that trading house, I would take a large 'legal' short leading up to a companies earnings. This position would not trip any FTD's. However it would be very close to that threshold. Then, when earnings came out, they could infinitely click on the naked short button. This would trigger massive amount of selling pressure on the stock. Let's be clear, that selling pressure is coming directly from counterfeited shares - they have not been backed up by real shares. Thus, when the share price gets hammered into oblivion by the naked shorting, they can cover their original short positions and make millions in illicit gains.

GRPN's short volume is amazing. It's taking a massive pounding from an entity that doesn't want to let the FTD threshold go away. FINRA's website also supplies daily short volume on GRPN.

Have you ever flashed a light in a dark cupboard? Only to see the cockroaches scurry into the shadows? That's what GRPN needs. It needs everyone to understand what is happening to its stock. It starts with the SEC and FINRA. They need to investigate the millions of FTD's that are being generated from GRPN's daily trading activities. The SEC needs to develop a mechanism to sync up REAL shares that are loaned out to be shorted. Thus, a roll call can be made, to make sure the system can be purged of counterfeit shares. However, based on their reaction to Universal Express's initial jury awarded court victory, there's absolutely no chance that they will do anything. After all, bringing Naked Shorting into the limelight, severely damages the integrity of the markets.

The last two quarterly announcements saw GRPN drop an amazing 35% (from after hours high through the next days closing) and another whopping 20%. In both quarters, GRPN slaughtered revenue expectations by a country mile. Their earnings were a little light, but no where near to justify the brutal pounding the equity took.

So, the last thing you may be thinking. Why am I even talking about GRPN and Naked Shorts, if I have an extremely large position in GRPN? Because the downward pressure on GRPN is illegal. If it wasn't for the massive naked shorting, GRPN would be trading at a much higher share price. GRPN is growing annual revenues by more than 20%, has 11,200 employees and has a NET cash position of $1 billion. They are projecting significant EPS growth for the latter half of the year and CY15. Thus, eventually market forces will correct GRPN's share price. If it doesn't, they will go private or will be the target of a takeover.

Looking forward, I'm very optimistic about GRPN shares. Why? Because GRPN's forward guidance will exceed Quarter Over Quarter (QoQ) and Year Over Year (YoY) comparisons. Otherwise, fear mongering won't work, as EPS growth will be in full gear. The projected growth in EPS for GRPN will be the flash light that will vaporize the FTD's and the naked shorting of GRPN shares. This alone will liberate the share price to new highs.

Disclosure: I have a large position in GRPN. I'm also looking to add to my current long position. My 2 year price target for GRPN is $15.